More bad news from Europe… Last week it was Credit Suisse. The week before, UK pension funds were bailed out amid a falling pound sterling. This week? A pivotal moment in Germany’s energy-fueled economic downturn.
And as I will explain shortly, the start of a chain reaction potentially leading to the breakup of the euro.
Big call, I know!
But if I’m right about that, the future will be very different. Not just for Europe, but for the whole world of money and markets.
Let me explain more…
OK, so what’s wrong this time?
This chart explains it:
What you see is that Germany’s trade surplus is about to turn negative (black line).
This means that it will import more than it will export. Which basically means he turns into a net spender rather than a net saver.
Why is this important?
Well, German savings essentially help finance their most indebted eurozone neighbors. Countries like Spain, Portugal, Italy and Greece.
In good times, it works well for all sides.
The reward for Germany’s “generosity” is that it benefits from a weaker currency (than would be, for example, the Deutsche Mark), which helps to make their exports competitive.
Meanwhile, their less fiscally responsible neighbors can use the strength of Germany (as a guarantor of last resort) to reduce their own borrowing costs.
This chart shows that all of that could be about to change…
Soaring energy costs (as well as simply not having enough energy supply) are killing the manufacturing-based growth pole in Germany. This hurts their terms of trade and makes their exports uncompetitive.
It’s a double whammy.
And that means Germany can’t afford to carry the burden for other countries any longer.
As Robin Brooks, chief economist at the IIR, noted:
‘The German trade surplus has disappeared. As Germany revamps its growth model, it will shrink its fiscal space, so there will be less for everyone to do.
‘Europe hasn’t realized it yet, but structural labor and product market reforms are about to make a comeback.‘
In other words, Germany will be faced with a choice.
Use your savings to support your own economy?
Or continue to finance its neighbors to the south?
I think we know which option they will ultimately choose…
End of the world author Peter Zeihan also noted the important moment, tweeting:
‘Germany is rapidly changing from being the biggest donor in the EU to a taker. I think it is safe to say that Europe is not prepared.‘
But why is this such an existential threat to the euro?
Let’s move on to this next…
Much of my new thesis for the next seven years
Last week I published a hypothetical timetable for Bitcoin [BTC] to reach $1 million by 2030.
This may seem like a wild prediction, given the current state of the crypto markets.
But a collapse – or a structural change in the euro – is a big driver behind this thesis. And that seems a more distinct possibility than most acknowledge.
As I predicted in the presentation:
‘2025 will be the year when the euro experience finally collapses under the weight of members’ monetary imbalances.
‘Again, I’m not going to dig too deep into the quicksand of macroeconomics.
‘Here we examine the basic assumptions.
‘And a basic assumption is that Germany, facing its own economic crisis, refuses to support Italy, Spain and other debtor countries.
‘Here’s what things look like right now:
‘How long can frugal Germans sustain their high-spending European partners?
‘Maybe when things are going well, they will happily do it.
‘But my prediction is by 2025 things won’t be good.
‘We are already seeing things start to fall apart, with soaring energy prices providing the trigger point:
‘German industry is still at a critical point today.
‘As Bloomberg pointed out:
‘As this unfolds, what happens next?‘
It’s funny, but in four short weeks after writing this, it doesn’t sound half as crazy now!
What happens afterwards?
The trillion dollar question…
It’s dog breakfast everywhere you look in Europe.
War is upon us, rising energy costs, rising debt costs and their most economically powerful member is beginning to weaken rapidly.
Worse still, I don’t think the Germans will get help from their main ally, the United States.
Indeed, just last Friday, a German minister was openly critical of the United States over natural gas prices, saying:
‘Some countries, including friends, sometimes reach astronomical prices [for their gas]. Of course, this leads to problems that we need to talk about.‘
We’ll see how the United States reacts, but OPEC’s decision to cut oil production last week won’t help matters.
And on the monetary front, the Federal Reserve clearly does not consider Europe at all in its decisions.
On Friday, Fed member Christopher Waller said:
‘It is not the Fed’s responsibility to tackle the problems of other countries.‘
That means more rate hikes leading to a stronger US dollar — and all the big trouble that’s causing in the rest of the world — are likely to continue.
By the way, economist Lyn Alden responded on Twitter to Waller’s comments, noting:
That’s a great point…
I mean, why would any country – friend or foe – go back to investing in US debt after all this?
And what does this does it mean for the reserve currency status of the United States in the long term?
Big questions that will play out over the next decade.
But back to the European situation.
Even within the bloc, tensions are beginning to surface over what Germany might do next.
As the FinancialTimes reported Friday:
‘Spain and Belgium have issued warnings over the consequences of Germany’s huge fiscal stimulus package for the EU’s single market as the bloc tries to find a unified response to soaring oil prices ‘energy.
‘Germany’s announcement of a €200 billion fiscal stimulus package last week prompted other EU member states to warn of unfair distortions of competition if some states, in particular those with deep pockets are pursuing significant support measures.‘
Can the eurozone survive intact?
It is going to be difficult.
History suggests that European nations stray further – to political extremes – when tough economic times hit.
And the recent Italian election of far-right candidate Giorgia Meloni suggests that the process is already underway “on the ground”.
Interesting times ahead…
Editor, silver morning
PS: If I’m right about how this is all going, we’re at the start of a monumental decade-long race for bitcoin.
Watch the full timeline overview here and decide for yourself.